Comment and opinion for retail investors in the UK
The push me/pull you tug of war in stock market valuation judgements continues, with the pessimists seeing more central bank rate rises and recessions all over the place and the optimists predicting the end of the monetary tightening and the brakes coming off a little.
I have already posted that I see a lot of sense in the arguments of those market commentators who say that central banks’ determination to crash the economies of the developed world into recession, even suggesting that stock markets being positive is unhelpful, is the worng strategy because it is manifestly not working and in any case it is policy reaction appropriate to different causes. We have been getting supply side driven inflation and the reaction has been appropriate to demand led.
I saw UK inflation numbers after first publishing this post and that is more evidence of supply side issues (food costs) feeding into the numbers.
A common analogy for the inflationary risks and the chosen policy strategy is of a car accelerating too fast where a bit lighter foot on the throttle might be appropriate but a panic stricken novice driver jams on the brakes very hard. The ‘novice’ driver in this case is the boss of the US Federal Reserve who is after all a lawyer by training and an investment banker with a rather patchy career prior to getting public appointments. Indeed, he could himself be blamed for feeding asset price inflation (now much frowned on by some other central bankers) in the response to Covid-19.
Modern anti-lock braking systems mean that in most situations the car won’t slide across the road when you max out the brakes with your right foot (exactly what happened to me in my first driving test emergency stop) and you get feedback in the form of pedal judder and a flashing light. Very useful when driving down steep hills on snow and ice!
It is now obvious that the failure of SVB and Signature Bank was a combination of inadequate regulation (that being the consequence of over influential lobbying in the USA) and the extremely fast and steep rises in interest rates from a base of virtually zero. You can read many more detailed explanations all over the internet.
A whole range of recent and maybe curious news items have seemed to me relevant to the short term direction of markets and maybe give us some hints, or at least warning signals, on the likely longer term trend. Here are three for you to ponder.
In the game of chicken that markets have been playing with the Fed, markets put their foot on the gas late in 2022 and bet that the Fed would put the brake on interest rate rises. The US central bank did offer some comfort by slowing a little, but as if wishing to let everyone know that its not going to be forced off the road quite yet, it has been blowing its horn to the tone of ‘we’re not finished yet’ repeatedly over recent weeks.
This week, the markets decided the amount of road ahead before a very messy collision was shrinking a little too fast and touched the brakes. Given the rate of returns on growth stocks (up to 10%) in the first 6 weeks of 2023, that is maybe not a bad thing. Bond yields also picked up again, as we would expect, but I think that is only a temporary blip.
Or, for those of you who have long memories of English media culture, “That was the year that was” (TW3 was the BBC show).
In honour of the legendary David Frost – Hello, good evening and welcome to my backward looking start to this commentary. No singing elements though!
Before we take a look at global stock markets, we need to be reminded who the boss is. If anything the dominance of the US market has expanded which we as Brits may not always remember. This may well be only because the US dollar has returned to being the dominant reserve currency as US interest rates lead the move back upwards. This chart shows the current composition of global equity markets by value (assumed to be in US dollars but could be Euros- source was not clear).
Keep this in mind when reviewing that data below. If you had accepted a market cap weighted global tracker fund (especially a hedged one), you would have been guaranteed poor performance.
After a healthy and sustained period of growth from mid October, global equity markets, as recorded by the MSCI World Index fell back a little in the last week, but the chart still has a solid looking recovery on the right hand side. I have suggested that the market has been poised to react to good news for some time and the slightly more dovish tone of central bankers, slowdown in consumption data and weaker employment numbers will all have been taken as leading indicators that the worst of the monetary tightening (ie rising interest rates and the end of QE) is behind us.
In the UK, the Hunt mini-budget brought the expected fiscal tightening (ie tax rises and spending cuts). That was all as expected and indeed, much had been leaked in advance to soften up expectations. UK markets were more fraught about the prognostications for the UK economy from the OBR, the Bank of England (which has certainly well and truly fallen out with the government) and global economic forecasters.